Murray’s first FSI insights: Government not a bailout backstop

Four months into the Financial System Inquiry (FSI), and chairman David Murray has given his first insights in a speech delivered to the Australian Business Economists last week.

He said the inquiry had received over 270 submissions, and he’s already personally attended most of the almost 100 stakeholder engagement meetings.

Murray has also sought advice from international experts.

Overall he said the most frequent issues raised have been regulation, competition, consumer outcomes, ageing and superannuation, banking and technology.

In his speech Murray focused heavily on the problems of moral hazard that arise due to an expectation that the government will have no choice but to bail out a failing institution using taxpayer funds.

“This expectation reduces market discipline, encourages riskier behaviour, and can represent a large implicit subsidy of private enterprise,” he said. “Significantly, the overall outcome was that the GFC shifted public expectations of when and where governments will intervene. The question for us now is whether we are content to accept that shift.”

Following on from this, Murray said it’s vital to think about the role and performance of the regulators.

A variety of submissions raised concerns that the safety and stability of the system may have overridden interests in competition and innovation, and Murray said the FSI provides an ideal opportunity to question whether it is necessary to recalibrate.

He also targeted the Australian superannuation system in his speech, saying it’s been predicted super assets will exceed those in the banking system by around 2030.

The Reserve Bank of Australia has already drawn attention to the short-term focus of superannuation funds, Murray said, as well as the fact a well-functioning and efficient system would be expected to better match the maturity of assets and liabilities.

“You would also expect it to be cost effective. I note the recent Grattan Institute report suggesting ours may not be.”

Many submissions have also pointed to a weakness of the superannuation system, especially in the retirement phase, noted Murray.

He suggested the system currently focuses too heavily on maximising wealth creation during the accumulation phase, rather than the delivery at the time of retirement.

Other key points made during the speech included the potential risks to Australia in relying too heavily on international markets for funding and capital, and the growing role of technology in financial services.

At the conclusion of the update, Murray said the FSI are now working towards releasing an interim report in July.

The report will ask a series of questions that will form the basis of the next stage of submissions.

The questions will cover themes such as the expectations of when the government should step in to prevent loss to consumers, whether current systems prevent the Australian economy from operating and allocating funds efficiently, and whether current regulation is appropriately calibrated.

“Your perspectives in the submissions following the interim report will be important, because trade-offs are not easy,” Murray said. “As I said at the outset, we must balance the objective of the system, which will not be a simple exercise.”

This looks to be a very well thought through strategy to tackle the financial issues effecting Australia. This is a huge change from the emotional, illogical process undertaken by the previous government. It gives me confidence; we are now on the right track.